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May 17, 2012

Reporting From Europe: Will Germany Push Greece Out of the Euro?

This is part of a series of blog postings from Europe at a critical time by peregrinating Ben Warwick, regular blogger for AdvisorOne and contributor to Investment Advisor. Ben is an investment advisor and author of the Searching for Alpha monthly newsletter.

By the end of June, the Greek government is supposed to specify a further round of budget cuts, worth roughly 5.5% of GDP. These are to occur in two tranches—the first in 2013, the second a year later. This is necessary to fulfill the requirements of the roughly $250 billion bailout package from the IMF. Angela Merkel, Germany's chancellor, is talking a tough game, saying that the cuts are necessary to keep Greece in the common currency.

There is hardly a consensus within the troubled country's borders. Presently, there isn't even a Greek government. Although two-thirds of Greek voters want to stay in the euro, about the same number refuse to accept further austerity.

The prevailing view from European investors whom I've met with is that it's not wise to play poker with Merkel. If Greece does not meet its obligations, many here feel that Germany will force it out of the euro. That may prove to contain losses in the short term—after all, most of the banks already written off the bulk of their Greek exposure—but the risk of other weak countries leaving the eurozone would eclipse any issues with Greece. A series of moves to "ring-fence" the Greek problem have been initiated by the IMF, but many feel that contagion is a real possibility. That group includes British prime minister David Cameron, who said Thursday that the eurozone will either break up completely or figure out a way to work together. As England's largest trading partner, the eurozone certainly poses a serious threat to the British economy, which is already in a double-dip recession.

Investors here are keeping plenty of dry powder handy, with the belief that asset sales will lead to significant opportunities in Europe. A number of the largest U.S. private equity firms, including J.C. Flowers and BlackStone, have moved key personnel to the area. But until there is further visibility on the outcome—which may be six to 18 months away—domestic advisors are cautioned to maintain a more localized asset allocation. Although I did not see any sign of widespread panic among larger investors in Europe, many seem content to sit on their hands as the crisis unfolds.